INTRODUCING RVI
PROTECTING THE RESIDUAL VALUE OF COMMERCIAL ASSETS NICK HESTER IN OUR LONDON OFFICE IS ONE OF THE FEW PEOPLE IN THE WORLD WORKING IN THE NICHE SECTOR OF RESIDUAL VALUE INSURANCE (RVI). HE EXPLAINS HERE ITS BENEFITS, HOW THE MARKET HAS EVOLVED, AND OPPORTUNITIES FOR QATAR RE. Nick Hester
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ver the past 30 years or so, Residual Value Insurance (RVI) has had some bad press – usually because of a misunderstanding of what it is, but also because policies were difficult to comprehend and almost impossible to claim against. Today, it has become an important tool in the world of asset finance and the demand is growing, allowing prudent underwriters to put together a diversified book of business in noncorrelated asset classes at very attractive rates. RVI, in its traditional definition, indemnifies the insured against a loss which might occur if the sale proceeds of a properly maintained asset are less than the asset’s insured residual value at the point specified in the policy – normally the end of a charter or lease. The objective of RVI is to indemnify the insured for a financial loss due to an unexpected occurrence which causes the future value of the asset to be less than forecast. In the context of ship and aircraft finance, a catastrophic event affecting asset or residual value insurance would occur when the sale and purchase or used aircraft market valued an asset at considerably below the minimum expected insured value when the coverage was purchased. With our RVI policy – known as a “proceeds policy” – all assets go through a 12 or 9 month remarketing period during the final year of the charter/lease to try to obtain the best sales price for the assets, thus mitigating a claim under the policy if the asset can be sold for more than the sum insured. Where clients leasing assets such as ships or aircraft are unwilling or unable to take on any or all of the asset risk involved in the transaction, lessors purchase RVI, which underwrites this risk.
Underwriters are prepared to consider RVI on a diversified range of assets with proven longevity. These include commercial vessels and offshore assets, helicopters, and fixed wing aircraft and other commercial transportation assets, plant and machinery known as “yellow goods”, construction equipment, mining equipment and certain types of commercial property. Prior to the 1980s, there was little activity in the RVI market. Some banks and leasing companies took asset risk through their lease books. The RVI market developed on a small scale during the mid-1980s when Clarendon began offering standalone RVI. Before this, several other insurers had included RVI in package policies – most notably Lloyd’s of London in the late 1970s offered a policy for IBM computers that included RVI. Unfortunately, these early policies were fraught with unforeseen technology issues which resulted in many claims, and to this day, Lloyd’s will not write RVI. The RVI market grew and developed in the early 1990s with the founding of the first dedicated RVI insurer called RVI Guaranty, which is still underwriting business today. Towards the end of the 1990s, when insurance companies faced soft markets and were seeking to exploit the convergence between banking and insurance, some high profile transactions, many of which were effectively RVI deals, were completed. This created a large amount of interest and the market boomed in this period, with many new players entering the sector. Unfortunately, many insurers wrote business on private passenger automobiles and other consumer and consumer-related assets 6
The market for RVI is growing again after most reinsueres withdrew their underwriting capacity in 2008/9. Qatar Re is one of a handful of specialist insurers/reinsurers in this field, offering RVI on most core, commercial assets, specialising in aircraft, ships and “yellow goods”.
Benefits to the lessor in an RVI transaction: n✓ n✓ n✓
Finance at a lower cost from the bank or capital markets, making the purchase/lease of the asset cheaper The security of a guaranteed value at a designated point in time - normally when the lease expires The cost of an expensive high value asset can be spread over its useful life
Benefits to the finance provider in an RVI transaction: n✓ n✓
A high credit rating can be attached to a given percentage of the loan amount Unforeseen asset risk is removed from the bank’s risk assessment and calculation (banks tend to prefer to take only credit risk)
Benefits to the lessee in a RVI transaction: n✓ n✓
Cheaper lease payments The security that the RVI Insurer has conducted thorough due diligence on the asset via the expert valuations
and quickly began to generate losses. Turmoil in the global financial markets over the past few years has caused many insurers to withdraw from their financial products lines and, as a consequence, the majority of insurers withdrew RVI underwriting capacity in 2008 and 2009 – despite the fact that underwriting results on commercial RVI transactions remained largely unaffected by the crisis. Today, the market is growing again, although it is still relatively small and Qatar Re is one of a handful of specialist insurers/reinsurers in this field. RVI does not provide any form of credit cover, however the Insurer is aware that the RVI policy will always be affected, albeit indirectly, by the credit quality of the underlying lessee. Qatar Re offers RVI on most core, commercial assets,
but we specialise in aircraft, ships and “yellow goods”. We are able to offer policies of up to 5 years for “yellow goods”, 10 years for new ships, and 12 years for new aircraft. Since the financial crisis, the changes to the world banking landscape have meant an increased demand for RVI as the financiers are less able to take asset risk. At the same time, the RVI market all but disappeared creating a severe supply demand mismatch. We are confident that Qatar Re’s arrival into the market will mean that some of that growing demand will now be met. Nick Hester is based in London and is responsible for building up the RVI business as a Representative. He has more than 40 years’ experience in key positions in the broking and underwriting industry and is one of less than 10 people in the world doing RVI.
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